ArthroCare first quarter total revenue increases 5.6% to $92.9 million

May 3 2012

ArthroCare Corp. (NASDAQ: ARTC), a leader in developing state-of-the-art, minimally invasive surgical products, announced its financial results for the first quarter ended March 31, 2012.

FIRST QUARTER 2012 HIGHLIGHTS

• Total revenue of $92.9 million.
• Product sales increased by 5.8 percent.
• Income from operations of $17.4 million, or operating margin of 18.7 percent.
• Net income available to common stockholders of $12.1 million, or $0.36 per diluted share.

REVENUE

Total revenue from continuing operations for the first quarter of 2012 was $92.9 million, compared to $87.9 million for the first quarter of 2011, an increase of 5.6 percent.

Product sales for the first quarter of 2012 were $88.4 million compared to $83.5 million in the first quarter of 2011, an increase of 5.8 percent. Proprietary product sales were $83.6 million in the first quarter of 2012 compared to $78.1 million for the first quarter of 2011, an increase of 6.9 percent.

Worldwide sales of the Company's Sports Medicine products increased $2.6 million or 4.6 percent. In the Americas, Sports Medicine product sales increased $1.6 million which consisted of an increase in proprietary Sports Medicine product sales of $2.2 million, or 6.9 percent, and a decrease in contract manufacturing product sales of $0.6 million, or 11.1 percent. International Sports Medicine product sales increased $1.0 million, or 4.9 percent, in the first quarter of 2012 compared to the same period in 2011.

Worldwide ENT product sales increased $2.8 million, or 11.8 percent. Americas ENT product sales increased $1.7 million or 8.7 percent. International ENT product sales increased $1.1 million or 26.4 percent.

Other product sales declined $0.6 million in the first quarter of 2012 compared to the same period of 2011.

Had the same foreign currency rates been in effect in the quarter ended March 31, 2012 as were in effect in the same quarter in 2011, the U.S. dollar reported value of product sales would have been higher by $0.3 million for the quarter ended March 31, 2012.

GROSS PRODUCT MARGIN

Gross product margin was 69.8 percent for the first quarter of 2012 compared to 70.4 percent for the first quarter of 2011.

INCOME FROM OPERATIONS

Income from operations for the first quarter of 2012 was $17.4 million compared to $16.6 million for the same period in 2011. Operating margin for the first quarter of 2012 was 18.7 percent compared to 18.9 percent for the same period in 2011.

Under the short-term incentive plan for 2012 approved by the Board of Directors, Adjusted Operating Margin is a key metric for purposes of evaluating business performance. Adjusted Operating Margin is Operating Margin adjusted for investigation and restatement related costs. Investigation and restatement related costs were 1.2 percent and 2.5 percent of total revenue for the first quarters of 2012 and 2011, respectively, and Adjusted Operating Margin was 19.9 percent and 21.4 percent for these same periods. Adjusted Operating Margin is a non-GAAP measure of profitability and it should not be considered as a substitute for measures prepared in accordance with GAAP.

Total operating expenses were $48.9 million in the first quarter of 2012 compared to $46.6 million in the first quarter of 2011. Research and development expense increased $0.8 million and sales and marketing expense increased $2.1 million, partially offset by a decrease of $1.1 million in investigation and restatement-related costs.

NET INCOME AVAILABLE TO COMMON STOCKHOLDERS

Net income available to common stockholders was $12.1 million or $0.36 per diluted share in the first quarter of 2012, compared to $11.9 million, or $0.36 per diluted share, in the first quarter of 2011. Net income available to common stockholders in the first quarter of 2011 included income from discontinued operations of $0.3 million, or $0.01 per diluted share.

BALANCE SHEET AND CASH FLOWS

Cash and cash equivalents was $162.0 million as of March 31, 2012 compared to $219.6 at December 31, 2011. In the first quarter of 2012, the Company paid $74 million as required under the proposed settlement of the private securities class actions. Excluding this payment, cash and cash equivalents increased $16.4 million in the first quarter of 2012. Cash flows used in operating activities for the three months ended March 31, 2012 was $55.6 million compared to cash flows provided by operating activities of $15.2 million for the three months ended March 31, 2011.